Data and Research June 29, 2021

Lack of Income, Future Income Misperceptions Hinder Retirement Savings

Not making enough money and overestimating what benefits will be received from Social Security are keeping some Americans from saving, studies show.

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Despite reports of increased retirement savings and low overall withdrawals from retirement accounts during the pandemic, many Americans were hit with reductions in income and some are still trying to find new work or remain at a reduced income level. And, on top of that, the pandemic exacerbated income inequities that existed beforehand.

A MagnifyMoney survey of 2,050 U.S. consumers from May 3 through May 6 found 48% of people with a retirement savings account either stopped saving or decreased their contributions amid the crisis. About one in six haven’t started saving again. However, nearly three in 10 survey respondents said they were already behind in saving for retirement before the pandemic hit.

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Nearly two-thirds (64%) of Americans surveyed named at least one barrier to saving for retirement, but not making enough money to reach their contribution goals (30%) was the No. 1 barrier “by a landslide,” MagnifyMoney says.

Another study suggests that the income people think they will get from Social Security may be hindering them from saving enough for retirement. Researchers at the Michigan Retirement and Disability Research Center at the University of Michigan found most individuals face significant uncertainty about the amount of Social Security retirement benefits they will receive after retirement and tend to overestimate these amounts.

A survey by the researchers found current workers recognize that they do not have a good idea of what their future retirement benefits will be. Forty-nine percent of survey respondents reported having no knowledge about their benefit amount. “Having more uncertainty about future retirement benefits is positively associated with a higher expectation bias and is associated to an increased probability of overestimating future benefits,” the researchers say.

Their modeling also indicates that when individuals overestimate the Social Security benefits they will receive, “this results in too much consumption during the working years, too little asset accumulation and, therefore, too little consumption in retirement on average with respect to what would be optimal for them.”

In addition to Americans overestimating their Social Security benefits, they may not know that those benefits will not “buy” what they once would. A report from The Senior Citizens League says Social Security benefits have lost 30% of its buying power since 2000. Between January 2000 and this March, Social Security cost-of-living adjustments (COLAs) increased benefits by 55%, but the costs of goods and services purchased by typical retirees rose by 101.7%. The Senior Citizens League says, “If inflation in 2021 continues to climb through the end of the year, this loss of buying power could deepen.”

These findings would suggest that Americans could benefit from more Social Security education; however, according to the Schroders 2021 “US Retirement Survey,” just 10% of non-retired Americans ages 45 and older are planning to wait until age 70—the age at which an individual reaches their maximum monthly benefit—to begin taking their Social Security benefits, and the decision appears to be deliberate. Seventy-four percent of non-retired respondents and 84% of non-retired respondents ages 60 to 67 said they understand that the longer they wait to take Social Security the more they will receive. Joel Schiffman, head of intermediary distribution, North America, Schroders, says, “It might come down to being able to afford to wait. And that’s a function of how much they have saved in order to generate sufficient income in retirement.”

Aside from increasing employee pay and educating employees about Social Security, what can plan sponsors do to improve their own workers’ retirement outlook?

It might seem unhelpful to encourage employees to save when they feel they are living paycheck-to-paycheck, but a study from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found contributions were the top factor increasing retirement savings balances, more so than benefits paid or investment returns.

Plan sponsors can help employees establish savings priorities for their health, emergency and retirement needs. Automatic enrollment in a retirement plan helps employees start to save, but sponsors can also use their plans to help employees build up emergency savings first or help employees save for retirement while paying off their student loan debt.

And, for those employees who were saving before the pandemic but put their savings on pause or took withdrawals, plan sponsors can educate them about what a year without retirement savings can do to their retirement outlook.

Opinions June 29, 2021

Steps to Implement a Financial Wellness Program

Peg Knox, with DCIIA, discusses the implementation of financial wellness programs, from the introduction to employees to the measurement of success.

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Financial wellness programs are increasingly embracing a broader definition of the term to include the full range of employer benefits, such as health and retirement benefits, emergency savings, work/life balance programs, etc. This more holistic view has been driven in part by the COVID-19 pandemic, which has magnified issues in emergency savings, income inequality, work-life balance and other relevant topics, and accelerated change in this area.

The Defined Contribution Institutional Investment Association (DCIIA) provided a starting framework for financial wellness discussions in our 2017 white paper, “A Financial Wellness Primer.” This paper may help to address the “why” of implementing a financial wellness program, noting, “Whether motivated by altruism and paternalism, ROI [return on investment], lower costs or a dynamic workforce environment, the employer’s goals and employee’s desires are well aligned when it comes to retirement readiness and financial wellness in the workplace.”

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In previous articles, we have covered participant communications and creating inclusive financial wellness programs and touched on some of their typical elements and implementation considerations. As wellness programs evolve, they are going beyond retirement topics to include education and assistance with:

  • Budgeting and personal finance;
  • Student loans;
  • Emergency savings; and
  • Financial considerations in health insurance and health care.

When announcing a new financial wellness program or offering, consider the following:

Remind employees of what’s in it for them: To those creating a wellness program, it might seem obvious why it’s important and how it benefits employees, but those features need to be clearly spelled out—don’t assume inferences will be made. Theoretical discussions on the benefits of saving or jargon-filled updates are likely to alienate rather than engage your employees. The more customized you can make your messaging based on employee demographics, the better.

Provide engaging tools: Attention spans are short, and time is tight. Give employees actionable, useful resources such as checklists, timelines, FAQs and tip sheets. Bundle information into annual enrollment, but also send reminders throughout the year. Consider contests, quizzes and fun live or virtual events to bring financial wellness topics and resources to life. Leverage internal resources such as marketing, social media and communications teams and employee resource groups.

Set specific goals and measure progress: Share your goals with your employees and how you came up with them. Tell them you’ll be checking in to measure progress and get feedback. If people feel that they are part of something bigger than themselves, they might be more incentivized to be engaged. Note that their individual work on financial wellness helps your organization thrive and grow stronger, as employees feel more empowered and in control of their financial life.

Offer multiple engagement points: Providing a phone number and email address for employee questions is just a starting point. What about offering texting, a chat feature on your intranet or even a benefits app? Can you create a dedicated channel on internal communications platforms such as Salesforce, Slack or similar tools that will help to meet employees where they are? As offices open back up, consider having an information table at employee happy hours or meetings—real-life interaction doesn’t need to be limited to an annual benefits fair.

As plan sponsors look to assess their programs’ impact, measurement tools might include:

  • Employee surveys: Brief “spot surveys” as employees engage with financial wellness programs can create a feedback loop for continual improvement. The key is to not only create the survey mechanism, but to implement a robust follow-through process that ensures that survey feedback is regularly reviewed and acted upon.
  • Digital metrics: Having staff or a consultant or service provider capable of monitoring, analyzing and reporting on web- and email-based metrics is almost table stakes in today’s digital environment, at least for larger organizations. These metrics can help you assess which communication programs and tools are getting attention and which ones are lagging. Again, a feedback loop is crucial, so the data is not reported in a silo or seen as an isolated function. Ideally, all key stakeholders should be aware of topline metrics and be empowered to take action to improve them.
  • Service provider reporting: What can your wellness providers offer to you and your participants in terms of a feedback mechanism? How can needed improvements or enhancements be communicated to them and what will the process be for ongoing monitoring and action? Having numerous participants ask the same question, run into the same problem or point of confusion, or otherwise hit roadblocks in program offerings, without being addressed, will continue to negatively impact engagement and outcomes.

Recent ongoing research from DCIIA’s Retirement Research Center and Commonwealth highlights issues specific to low- and moderate-income employees in light of COVID-19. Many of them are struggling with health issues, income losses and increased debt, and have tapped into (or tapped out) their emergency savings. Some are borrowing from friends and family, racking up expensive credit card debit or selling possessions to get by. Recordkeepers and plan sponsors can help these plan participants move in the right direction by:

  • Providing employee hardship funds;
  • Connecting employees with guidance on repaying debt;
  • Encouraging intermittent saving where their budget allows; and
  • Setting up emergency savings products through their platforms so that participants can begin saving for emergencies when they are able to do so.

Be sure that you are considering the full spectrum of your employee population as you assess and implement financial wellness offerings—often the decisionmakers are far removed from many of their employees when it comes to salary, benefits, education and day-to-day work experience. An effective and inclusive program will speak to—and benefit—everyone.

 

Peg Knox is the chief operating officer (COO) of the Defined Contribution Institutional Investment Association (DCIIA) and is a former plan sponsor. Additional resources on this topic are available in DCIIA’s Resource Library.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.

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